Think you are immune from non-compete covenants because you are a California employee? Think again.

Unlike many states, California outlaws non-compete covenants except in certain limited contexts (such as in connection with the sale of a business). Section 16600 of the California Business & Professions Code, in existence since 1872, provides, "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void."  California courts have consistently construed section 16600 as a strong expression of public policy ensuring every citizen's right to pursue a trade of his or her choice. As a consequence, clauses in employment agreements that purport to restrict post-termination the ability of an employee to work for competitors of the employer, or that prohibit solicitation of the employer's customers, are void and unenforceable. Even presenting such clauses to employees or potential employees may constitute an unlawful employment practice

Unlike California, such non-compete covenants are enforceable in most of the other states, if they satisfy the "rule of reasonableness" - that is, if such covenant's restrictions are reasonable in temporal and geographic scope. Most states would enforce a one-year non-compete clause if the clause is targeted at true competitors of the employer, for example. Massachusetts is one such state. In fact, many researchers have posited that Silicon Valley's superiority to Boston's Route 128 area as a technology hub can be attributed to the fact that Massachusetts enforces non-compete covenants and California does not.

California employees should therefore rest easy if they are presented with an employment confidentiality agreement that contains a non-compete covenant, presumably. Even if the clause exists, no court would ever enforce it against a California employee, right?

Wrong.

If the employment agreement is with an out-of-state employer and the agreement specifies application of that other state's law, it's quite possible that the other state's law will be applied so as to uphold the enforceability of the non-compete covenant, over 100 years of California law and policy notwithstanding.

Consider the recent decision of Aspect Software, Inc. v. Barnett, issued by a Massachusetts federal court on May 27, 2011. In that case, the court upheld the enforceability of a non-competition covenant against a California employee because, in the court's reasoning: (i) the agreement specified application of Massachusetts law, and under such law, non-compete covenants are generally enforceable; (ii) the court believed that even under California law, the clause may actually be enforceable - a dubious proposition at best; (iii) the public interest in ensuring that Massachusetts agreements, if freely entered into, are enforced, outweighs California's interest in protecting employee mobility; and (iv) the employee at the time of signing the non-compete clause was a resident of Tennessee, and moved to California only after he began his employment. Accordingly, the court issued an injunction prohibiting the employee from working for a competitor (which would have paid the employee a salary of $500,000 per year plus an additional $350,000 in potential bonuses).

Admittedly, the last factor in the court's decision will not apply in the usual case of an existing California employee being asked to sign a non-compete clause at the beginning of his or her employment. However, it's clear from the court's opinion that the ruling would have been the same even if the employee had always resided in California. Particularly telling was the Massachusetts court's refusal to lend credit to California's interest in employee mobility.

The lesson of this case and others like it is clear: if you are presented with a confidentiality or other agreement containing a non-compete clause by a non-California company, and this agreement specifies application of the law of a state other than California, there exists a non-trivial possibility that you will be the subject of a court-ordered injunction forbidding you from working for a competitor post-termination if you attempt to do so. In fact, the mere existence of the clause, combined with contractual application of another state's laws, would potentially be enough to deter future employers - even California employers - from considering you, given the litigation risks entailed in attempting to break the non-compete in question.

Always CYABS: cover your ass consult your attorney before signing.

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